Keep An Eye On Capacity Utilzation & Industrial Productivity

It was another big bullish week for stocks, despite Friday’s setback (which wasn’t even that big of a setback by the time the closing bell rang). All told, the average stock advanced 0.3%. That’s not much, but it’s still the third winning week in the last four.

Don’t start counting your chickens before they’re hatched though. We’ll give the market a reality check in a moment, right after a run-down of the major economic data from last week and this week.

Economic Calendar:

There’s little doubt as to last week’s major economic focus…. jobs, or lack thereof.

The biggie, of course, was the rise in the unemployment rate from 9.1% to 9.2% – a clear step in the wrong direction, underscored by a very weak number of new jobs added last month (57K private, or 18K counting government employees).

It’s interesting though, as the ADP employment change of 157K new jobs not only improved May’s addition of 36K, but cam in much better than the expected 60K. And, new as well as ongoing unemployment claims both drifted a tad lower. None of it screams ‘progress’… at least not enough to keep enough American’s working to sustain a decent recovery. But, it’s not necessarily all bad.

While we heard other data nuggets last week, none of them were as market-moving as the employment report card.

Economic Calendar

As for the coming week, it’s all about inflation and industrial activity, with a dash of consumer health sprinkled in.

The fireworks don’t even really start until Thursday with initial and new unemployment claims, but what we’re most curious to see is June’s retail sales numbers. They should be flat without autos, but lower including car sales. Last month’s numbers were pretty ugly too.

On the inflation front, we’ll get producer inflation on Thursday, and consumer inflation (the ‘inflation rate’) on Friday. The former is expected to be off by 0.3%, or up 0.2% on a core basis. That’s a good news/bad news situation. The latter is expected to fall by 0.1%, or grow by 0.2% on a core basis. Again, that’s a mixed blessing. As much as we hate to deal with inflation, an economy’s inability to dive inflation at all doesn’t bode well. We’ll see how the market responds; the response may be more telling than the numbers themselves.

Two industrial biggies also hit on Friday… capacity utilization, and industrial productivity. The former should be rolling in at 76.8% (a slight increase from May’s 76.7%), and the latter should be up 0.2%, following last month’s 0.1% increase.

Though short-term traders may play the before/after action with capacity utilization and industrial productivity, we’ve seen these two data sets serve longer-term ‘investors’ even more. The key is the direction of the trend for each – up is bullish, down is bearish, and it takes a few months for a true trend to become clear.

As is stands right now, both are trending upward, but just barely. A weaker-than-expected set of numbers could truly change the bigger tide, while even just a slightly better-than-expected reading could stave off some bigger-picture trouble. The market mostly doesn’t seem to care about that data, but in reality, it should care a great deal.

SPX, Capacity Utilization, and Industrial Productivity Index Chart

S&P 500 Index:

At first glance, it may look like the market was just taking a much-needed break last week after the prior week’s explosive gains. And, maybe that’s all this is. Or, maybe last week’s 4.1 point (+0.3%) gain for the S&P 500 (SPX) (SPY) was a sign that the buyers had already changed their minds. The fact is, with the SPX trapped in a proverbial no-man’s land [above key moving averages but below upper Bollinger bands, and touching none of them], you could make decent arguments for both.

Our take, however, leans on the bearish side of the fence in the grand scheme of things. Yeah, the momentum looks good, but there are two challenges to the bullishness here.

The CBOE Volatility Index (VIX) seems unable or unwilling to move any lower, which is understandable in that it’s hitting known floors around the 15.0 level (lower Bollinger band, and an absolute horizontal floor). With traders unable or unwilling to push the VIX lower, the market may not have what it needs to continue pushing higher either.

Though the gains were monsters every day of the week two weeks ago, even then, the volume wasn’t all that great; this is NOT a majority opinion. When you take a step back and look at the S&P 500’s chart since the beginning of the year, you can tell this quite readily. Take a look for yourself:

SPX & VIX Daily Chart

A look at a weekly chart of the S&P 500 doesn’t tell us much more, but it’s here we can tell that the buyers are slowing down as prior and likely ceilings are approached. The 1343 level has capped things more than once since February, and the pullback from the ultimate peak around 1370 wasn’t contested either. Last week’s high of 1356.48 and close of 1343.80 put both of those resistance lines back on the radar, along with the upper 30-week Bollinger band at 1370.7.

S&P 500 – Weekly

The SPX can bounce around between those levels all it wants – until they’re all broken, there’s not a lot more for the bulls to get excited about. Likewise until and unless the mess of moving averages at 1316 fails to act as support, there’s not much for the bears to pound their chest over either.

Bottom line – As boring as the ‘wait and see’ stance is, sometimes the best trading decision is to not trade at all. Let’s see where this all goes now, as there’s not a lot of conviction just now for a move in either direction.

Sector Performance:

Now we’re seeing a little more disparity between sectors, after last week’s "a rising tide lifts all boats" action. In other words, the trends we’re seeing now may actually mean something.

It’s relatively clear from here (though not clear enough to bet the farm on) that the prior laggards are playing ‘catch up’…. technology (XLK), materials (XLB), and gold stocks (GDX) to be specific. Consumer goods (XLP) also had a good week, which is a strength that’s been pretty reliable for several months now.

While one week does make or break a trend, we at least not have some leaders and laggards showing up on the radar.

Price Headley was inducted into the Traders' Hall of Fame in 2007 and is the Founder and President of BigTrends.com, which has been providing investors with real-time stock and options strategies (including trade recommendation newsletters) since 1999.
Price is one of the nation's most well-known experts on options trading… read more

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